networking - All posts tagged networking

Networking security technology vendor Palo Alto Networks (PANW) are down $1.59, or 1%, at $144.39, in late trading, after the company this afternoon reported fiscal Q2 revenue and earnings per share that topped analysts’ expectations,

Revenue in the three months ended in January rose 54%, year over year, to $218 million, yielding EPS of 19 cents, excluding some costs.

Analysts had been modeling $204 million and 17 cents per share.

On a GAAP basis, the company lost 53 cents a share, a little less than the year-ago 55-cent loss.

CEO Mark McLaughlin called the quarter “very strong across all metrics,” while CFO Steffan Tomlinson noted “new customer additions and expansion in existing customers resulted in record billings, revenue and deferred revenue in the second quarter.”

For the current quarter, the company sees revenue in a range of $219 million to $223 million, and EPS of 19 cents to 20 cents.

For the third time ever – and the first time in 15 years — the Nasdaq Composite Index closed above 5,000 Monday, a mark many investors doubted would ever return. The milestone caps a 12-year rally that erases the historic losses of the dot-com era.

The Nasdaq Composite Index rose 44.57 points, almost 1%, to close at 5,008.1, returning to the glory days it had not seen since 2,000.

While Freescale, which rose 12%, is a NYSE name, NXP, which is part of the Composite, jumped 17%. HP and aruba shares were flat on the deal, which had been rumored last week.

(There were also a couple other smaller deals: Mitel Networks (MITL) of Kanata, Ontario said it will spend $560 million in cash and stock to buy Mavenir Systems (MVNR), and Proofpoint (PFPT) said it will spend $40 million to acquire security technology vendor Emerging Threats.)

The merger enthusiasm propelled the rest of the index higher.

Among the Nasdaq’s Top 10 names, the two biggest movers were Intel (INTC) and Cisco Systems (CSCO), both holdovers from the dot-com era. Intel rose 2.4% to $34.06 and Cisco was up 2.3% to $30.19. Apple (AAPL), which today comprises 10% of the Nasdaq’s market weight had a relatively quiet day, up 0.5% to $129.09.

The Nasdaq first hit 5000 on March 9, 2000. It managed to close above that level on two consecutive days, before beginning its 80% descent, which bottomed at 1,114 on Oct. 9, 2000.

On an inflation-adjusted basis, the Nasdaq has more work to do. Using an annual inflation rate of roughly 2.2%, the Nasdaq would have to reach 7000 to match its March 2000 level.

Among gainers and losers elsewhere in the info-tech segment of the Nasdaq, information technology components notching gains today included microcontroller chip maker Atmel (ATML), rising over 6% to close at $8.86, perhaps boosted by positive words from Francois Meunier and colleagues naming it as one of their top Internet of Things stock picks.

Another chip name rising was Cypress Semiconductor (CY), which has a booth here at the Mobile World Congress in Barcelona and may have produced some positive developments, although there’s been no Street coverage yet to indicate that. Among releases from the company today was an item about a fingerprint identification product using its touch-sensor technology.

Cypress shares closed up $1.29, or 4.3%, at $31.40.

Skyworks Solutions (SWKS), a prominent vendor of wireless chips, also here at the show, got some positive mention from Mike Walkley of Canaccord Genuity reiterating a Buy rating, and an $81 price target, writing that he’d had a productive meeting with management at the show.

Management sees strong growth trends for the RF industry highlighted by a strong mix of 5-mode and even 6-mode smartphones for the Chinese market. With China Unicom and China Telecom ramping LTE smartphones, Chinese carriers requesting increased RF content to support roaming outside China, and with carrier aggregation LTE smartphones in China later this year, Qorvo management indicated strong RF content growth for LTE smartphone units consumed in China. Further, management anticipates total LTE units for the China market to grow from 120M units in 2014 to 300M units in 2015.

Among decliners, the biggest in infotech was Vasco Data Security (VDSI), which makes devices for “two-factor authentication.” Its shares closed down $2.28, or almost 9%, at $23.34, though there was no apparent bad news. The stock is thinly covered on the sell side.

Another loser on this historic day was Rovi (ROVI), makers of the popular Internet-TV box, its shares declining $1.99, or 8%, to close at $22.89.

In this case, it appears the sell-off was a comedown from a big run-up on Friday, after Reuters’s Liana Baker, Olivia Oran, and Nadia Damounireported that Rovi has been interviewing bankers to explore options for itself, after receiving pressure from hedge fund Engaged Capital to boost its shares.

However, Brean Capital’s Todd Mitchell, who has a Buy rating, and a $31 price target, wrote today in a note to clients that talking with bankers should highlight the underlying value of the stock.

The Nadaq Composite Index today crossed 5,000 for the first time in 15 years, hitting 5,001.29, before backing off to the current 4,984.16, still up half a point. My colleague Alex Eulereflects on the landmark.

It’s a busy Merger Monday, kicking off with NXP Semiconductors’s (NXPI) $11.8 billion cash-and-stock agreement to buy chip maker Freescale Semiconductor (FSL), a deal the two say will create the leading brand in automotive chips and microcontrollers.

NXP stock is up $14.30, or almost 17%, AT $99.16. FSL is up $4.19, or almost 12%, at $40.30, rising with NXP’s stock though the deal offers no premium to its prior close.

Second to that is Hewlett-Packard’s (HPQ) announcement it will purchase wireless networking vendor Aruba Networks (ARUN) for $2.7 billion in cash, for a total consideration of $3 billion including Aruba’s cash and debt. Analysts questioned whether the deal will actually do much for HP.

In a deal perhaps as surprising as the NXP announcement, Mitel Networks (MITL) of Kanata, Ontario said it will spend $560 million in cash and stock to buy Mavenir Systems (MVNR), equivalent to $17.94 per share of Mavenir.

Mitel has long been a provider of things such as PBX voice switching systems; Mavenir has positions in things such as the “evolved packet core,” a form of telecom switching equipment that is proliferating. It also participates in the market for so-called Voice-over-LTE, the next generation cellular voice technology.

Mitel said the deal would ”Adds a new high-growth business unit for Mitel delivering collaboration services across mobile and enterprise networks.”

Matthew Robison of Wunderlich Securities, who has had a Buy rating on Mavenir, writes that it is unlikely the stock will find a competing bid: ”Despite the complementary offering, recent sales of shares purchased as a venture investor imply to us that Cisco [Systems (CSCO)] will not bid for Mavenir.”

And lastly Proofpoint (PFPT) said it will spend $40 million to acquire security technology vendor Emerging Threats. Proofpoint shares are up 48 cents, or 0.9%, at $57.12.

Even before today’s spate of deals, there was rumbling of new M&A talk about storage giant EMC (EMC), whose 80% holding in VMware (VMW) has been the subject of speculation for a long time.

Reuters’s Nadia Damouni and Liana Bakeron Friday reported that the company has “decided against spinning off” VMware “after reviewing the idea over the last several months following pressure from activist investor Elliott Management,” citing three unnamed sources.

Srini Nandury of Summit Research Partners , who has a Buy rating on EMC stock, pens an item today saying it’s a good thing they’re not, as ”We always believed spinning off VMware would be detrimental to the long-term viability of EMC.” Nandury writes that his sum-of-the-parts model gets him to a new price target of $34 for EMC, up from $31.

The stock is at $28.75 currently, down 19 cents, or 0.7%.

Apple (AAPL) stock is up 24 cents at $128.70 following yet another price target increase, this one form Katy Huberty of Morgan Stanley, who raised her target to $160 from $133, reiterating an Overweight rating, writing that Apple is expanding categories at a faster clip, bolstering its overall “ecosystem.”

Meantime, the Mobile World Congress is going on in Barcelona, where I’m attending keynotes and panel discussion and meeting with companies. As I noted earlier, the category of wearable technology has a small but growing presence amidst the smartphones and networking equipment here.

Among the afternoon’s big tidbits was the on-stage session with Google’s (GOOGL) Sundar Pichai, who confirmed speculation about the company getting into the wireless business, saying Google will start off small to “show what’s possible,” as reported by Business Insider’s Jay Yarow.

This evening’s keynote panel at the conference is a conversation between Facebook (FB) CEO Mark Zuckerberg and Wired’s Jessi Hempel about Facebook’s Internet.org effort to bring Internet use to under-served parts of the world. Three telecom partners appeared onstage with Zuckerberg: Airtel, Telenor, and Millicom. More on that later.

HP CEO Meg Whitman said in the announcement that Aruba’s CEO, Dominic Orr, will run the Aruba effort when it becomes part of “HP Enterprise,” the name of one of the two new companies that will be formed this year by the break up of HP. Aruba chief technology and strategy officer Keerti Melkote will report to Whitman.

Whitman made the case that combining HP’s networking gear with Aruba’s wireless access points will make life easier for corporate IT:

Combining Aruba and HP will create a leader in enterprise mobility, positioning HP to enable and accelerate our customers’ transition to a converged campus network. The two companies are highly complementary – Aruba brings best-of-breed mobility software and WLAN hardware, and HP has a leading wired switching portfolio. This potent combination will enable enterprises to easily, quickly and securely deploy end-to-end mobile solutions, including the latest multi-gigabit wireless technology, across their campus. Together, HP and Aruba will offer a unified solution with value-added software features, including policy management, security and orchestration.

Among early responses this morning, Abhey Lamba with Mizuho Securities USA, who has a Neutral rating on HPQ, and a $38 target, writes that the deal will help HP’s networking efforts, but it is “unlikely to move the needle” for the company overall:

Aruba has grown revenues at a 30% CAGR over the past five years and is expected to expand its sales in the mid to high teens over the next couple of years. However, the company’s revenue run rate of ~$800-850mm would represent less than 2% of HP Enterprise’s overall revenues. As such, even high teens’ rise is unlikely to help solve the growth problem within the company. However, it will clearly help enhance HP’s offerings in the networking space that posted 4% growth in FY14 and 11% Y/Y decline last quarter.

Reflecting on the deal, FBR & Co.’s Daniel Ives, writes that M&A is “heating up” in tech, and that EMC (EMC), for one, should pay attention:

We believe the split then M&A strategy to bulk up its product wings is a path its tech stalwart brethren EMC should look hard at (e.g. VMware) as the “status quo” in this age of cloud computing and next generation datacenter paradigm shift is a flawed strategy, in our opinion.

Ives sees more M&A by large tech outfits such as Cisco Systems (CSCO) and Microsoft (MSFT), on the way:

To this point, with a myriad of hyper growth areas within the technology food chain such as big data, cybersecurity, and cloud computing, which have spawned some of the hottest growth companies seen in the software sector, we believe there is an arms race to generate “1+1=3” scenarios from cross-sell/upsell opportunities with smart strategic acquisitions in the space and given the evolving technology landscape. We continue to believe other larger technology vendors, such as Cisco, SAP, IBM, EMC, Oracle, and Microsoft, will seek to acquire their way into higher growth areas of the tech food chain while shedding/spinning off less fertile areas (e.g., SYMC/HPQ).

Shares of Comcast (CMCSA) are down 59 cents, or 1%, at $59.04, after the Federal Communications Commissionthis afternoon said Commission members voted three to two to approve chairman Tom Wheeler‘s proposal for “Net Neutrality,” under which broadband Internet will be “reclassified … as a telecommunications service under Title II of the Communications Act.”

Today’s ruling is a win for the Wheeler’s view. laid out in Wired magazine earlier this month, of regulations that “ban paid prioritization, and the blocking and throttling of lawful content and services.” Opponents of the view have labeled it the turning of the Internet into a heavily regulated utility.

A lot of the focus going into the ruling was about whether specific pricing or rate laws would be proposed. The brief states that the order aims to “not burden broadband providers with anachronistic utility-style regulations such as rate regulation, tariffs or network sharing requirements.”

Shares of Netflix (NFLX), which has had a war of words with operators such as Comcast, are up $4.56, or 1%, at $482.80, presumably because the ruling gives them more leverage in negotiating with Comcast and others. Verizon Communications (VZ) shares are up 11 cents at $49.31.

The net neutrality debate is about who picks winners and losers online: Internet service providers or consumers. Today, the FCC settled it: Consumers win.

Today’s order is a meaningful step towards ensuring ISPs cannot shift bad conduct upstream to where they interconnect with content providers like Netflix. Net neutrality rules are only as strong as their weakest link, and it’s incumbent on the FCC to ensure these interconnection points arent used to end-run the principles of an open Internet.

Given the lack of competition among broadband providers, today’s other FCC decision preventing regulations that thwart local investment in new broadband infrastructure also is an important step toward ensuring greater consumer choice. These actions kick off a new era that puts the consumer, not litigious corporate giants, at the center of competition policy.”

Former FCC chairman Reed Hundt was kind enough to take some time to talk with me by phone. Hundt’s been in Wheeler’s corner really since the beginning, and today he sounded upbeat about the rule-making.

I asked Hundt, “Should we be happy about this,” and he laughed and replied, “Well, it depends on who ‘we’ is.” As an Internet consumer? “Yes, I think you should be happy.”

“Should I feel justice has been done?” I followed. “Yes, I think you should feel that way,” he replied.

And if you’re a cable company? “I don’t think you should be worried one bit if you’re a cable company,” said Hundt.

His reasons?

The demand on the consumer side continues to increase steadily. All the cable companies are finding out that when they offer higher speeds, consumers say they want higher speeds. And also, the broadband providers, HSD [high-speed data], are fidning they are making much more money with data than video because on video side they are paying much more for content. They don’t pay for content on the Internet side. Look at it from the distributor’s point of view. They are distributing something they don’t have to pay for. All they have to do is provide everything the consumer wants. That’s a pretty good deal. The FCC said you can set the retail price you want. You go on the retail side to get the money to build the fastest pipe you choose to build. That is not difficult for the HSD provider. From the consumer perspective all I can say is that is what the consumers want. The FCC got 4 million emails [in the last few months], the most the FCC ever got outside of the wardrobe malfunction at the Superbowl. And well more than 90% of those emails said, give consumers the right to pick and choose what they want, without any limitations imposed by HSD. I think it simplifies the business model. The only obligation is to give neutral or equal access. A restaurant has to be open to all customers.

Netflix was willing to bend over backwards, Hundt implies, meaning there wasn’t any real downside for cable companies:

Netflix, which is always discussed, has gone as far — and I know this, I’ve heard some of the conversations about this — to the cable companies and said if you’re having any trouble, we, out of our own pocket, will solve that problem for you. In those negotiations, some of the cable companies have said, We don’t want that. They may want to use that physical space for their own equipment, or for other reasons.

I noted to Hundt that Comcast’s chief policy expert, David Cohen, came out with a negative statement about the ruling, stating that “while the rules are “rules that we support and agree should be put in place as legally enforceable by the FCC,” nevertheless, “Unfortunately, the FCC also decided to reclassify broadband as a telecommunications service under Title II of the Communications Act of 1934. We are disappointed the Commission chose this route.”

Hundt says Cohen has got it wrong on historical grounds:

I really like David, but the law in question here was passed in 1996 — FDR was deceased for 51 years at that point. Furthermore, the Internet had already been envisioned by policymakers, I know because I was in the meetings. I mean, we had a vision for the future. I said it in speeches, and Gore said it, in 1994. I’m picking on this particular trope of saying this is ancient, out-of-date law. The 1996 Telecom Act was passed in the early days of the commercial Internet to create a number of alternative and flexible approaches to regulation. This FCC has taken a very good approach for this point in time. It is the ’96 act they drew upon here. It is certainly true that the problem with history is there are lots of people in it! If you want to dig back in time, you can always find an analogy…

I asked Hundt about arguments that the FCC may lose this ruling in the courts. Hundt doesn’t see that happening:

One thing about Court of Appeals, most of the people on it don’t pay attention to these comments and to conservative and liberal rhetorical battles — what you can count on with appellate court is a very careful reading of their own decisions because they’ve looked at their own decisions several times now — based on last decision, beginning of 2014, I would say the FCC action is fully aligned with what the DC Circuit told them they should do.

The ruling has drawn responses from every inch of the policy spectrum.

From the celebratory:

“To me, more than anything else, this is a victory for the people, the consumers, the average Joes, against the suppliers who have all of the power and the wealth and make decisions for them and they feel hopeless and helpless. And here 4 million of us signed petitions. It’s an indication that the people can sometimes win. We’ve had a lot of defeats over the years, but once in a while we get a win.” — Steve Wozniak, appearing on Bloomberg TV.”

The FCC got this right. Without today’s action we were heading toward a new form of redlining, a sort of digital Jim Crow, that would have devastated communities of color and low-income consumers across the board. Treating broadband as a telecommunications service – that is, as the essential public service it is – is the only sure way to make sure we never face digital redlining.” — Stephanie Chen, Greenlining Institute

“These new rules will protect net neutrality, which has been crucial to modern day civil rights movements and fights for equality. Though there is more work to be done, today is a monumental victory for civil rights, many years in the making.” — ColorOfChange.org

From the disappointed:

“The FCC’s decision to regulate the Internet like a utility under Title II is the most sweeping FCC decision ever and the mother of all FCC overreaches. The FCC has ignored the legal guidance of the court that twice overturned the FCC before, and is now asserting vastly more unbounded authority over the Internet than the court has twice said the FCC does not have.” — Scott Cleland, Netcompetition.org

“Today’s FCC actions imposing discriminatory, anticompetitive regulations on the Internet and preempting state competition laws trampled on the rights to free speech and freedom of the press, state rights, and fundamental principles of the free market.” — The Center for Boundless Innovation in Technology

“Today’s FCC votes resolve nothing. The FCC is bound to lose in court on much or all of its plan to remake broadband into a heavily regulated service — or, even better, a government-run monopoly.” — TechFreedom

“The FCC has voted to do that which Congress has denied — and that’s essentially to rewrite the 1934 Communications Act to treat broadband Internet as a utility under Title II. Whatever the merits of ‘net neutrality,’ the fact is that this entire process has been designed to avert the traditional, constitutional lawmaking process.” — American for Limited Government

“The uncertainty created by the FCC’s plan will jeopardize the fast pace of private sector investment and improvements. In addition to having an immediate impact on investment, the FCC’s plan is a Trojan Horse. If Title II is not struck down by the courts, a new Administration or new Commissioners could push the FCC to implement the full, heavy-handed regulatory authority it provides.” — Telecommunications Industry Association

“Today’s vote by the FCC reclassifying broadband as a Title II public utility service takes us in the wrong direction on the information superhighway. CEA supports a light regulatory regime [...] With this vote, the Commission has instead placed regulatory shackles and new legal risks on the Internet and those who use this technological marvel to create critical new services, products and jobs. The end result for consumers: less choice, higher costs and reduced innovation.” — Gary Shapiro, Consumer Electronics Association president

In the wake of the announcement, after market close, of chip maker Avago Technologies‘s (AVGO) $609 million acquisition of storage networking technology firm Emulex (ELX), it’s interesting to note that two board members of Emulex, Gary Daichendt, and Rahul Merchant, are on the board of directors of Juniper Networks (JNPR), and that both directors appear to have met with the approval in past of Elliott Management, the activist investing shop which has been involved in agitating at both Juniper and Emulex at different points in time.

Elliott is Juniper’s biggest shareholder, at last count, with a 39-million-share position, or almost 10% of the common. Elliott was also the biggest shareholder in Emulex a little over a year ago, when Daichendt and Merchant came onto that company’s board.

In November of 2013, after having become Emulex’s biggest shareholder, Elliott figured prominently in the announcement of a “three-part initiative” by Emulex to improve profits, and boost capital returns. Elliott partner Jesse Cohn was named in the Emulex release, applauding the plan.

As part of that plan, Daichendt was nominated to the Juniper board, with a ringing endorsement by Cohn.

Then yesterday, Merchant was named to the Juniper board, and Juniper said Merchant’s nomination came out of a process of deliberation that included candidates offered by Elliott.

In yesterday’s announcement, Elliott partner Cohn is again quoted, applauding the naming of Merchant.

The immediate question is, Does the presence of two directors at two companies involving Elliott Management imply a deal for Juniper might be in the works similar to what Emulex has gotten?

Hard to say: Emulex went through years of speculation about take-outs before arriving at today’s offer. And the 25% surge in Emulex tonight comes after Elliott management sold off its remaining 5.4 million shares of Emulex in December, according to the most recent filings.

If Elliott ever wanted an Emulex sale to happen through the help of these directors, it would appear Elliott walked away from the dance before the music stopped, leaving a lot of money on the table. Emulex shares were flat the last two years, before this afternoon’s announcement, and Emulex’s after-hours surge.

But Elliott, and Juniper shareholders, certainly might be interested in something happening, given that the Elliott management involvement to date has yielded a mixed track record.

There has been the cost cutting and the capital returns, totaling $4 billion authorized, but the operating performance has been mixed.

Bottom line, the stock is up almost 10% this year, but down just that much since the IOP was agreed with Elliott’s help a year ago.

The next milestone for Juniper is the coming Mobile World Congress show in Barcelona, kicking off on Sunday; and then on March 4th, the company’s CFO, Robyn Denholm, will be speaking at the Morgan Stanley Tech, Media and Telecom conference in San Francisco.

The Street today has been pondering what to make of a report today by Bloomberg‘s Alex Sherman and Ed Hammond suggesting Hewlett-Packard (HPQ) is talking with $2.5 billion (market cap) wireless networking equipment vendor Aruba Networks (ARUN) about acquiring the firm, citing multiple unnamed sources.

The logic of the deal would be as a challenge to Cisco Systems‘s (CSCO) dominant position in wireless networking equipment.

Today’s speculation came just before the announcement, after market close, of a smaller deal, Avago Technologies‘ (AVGO) bid of $609 million for Emulex (ELX).

That report drove up Aruba Networks stock by $3.86, or 21%, to close at $22.24.

Aruba, I should note, is due to report fiscal Q2 earnings results tomorrow, after market close.

UBS’s Amitabh Passi, who has a Buy rating on Aruba shares, and a $25 price target, writing,

We do not know the accurateness of that information, but do not consider it outside the realm of possibility. We recently highlighted the consolidation potential for the Wireless LAN industry (link). Mobility and the need for ubiquitous network access are secular themes, and it wouldn’t surprise us if HP wanted to increase its exposure to those trends.

Passi cites data from market research firm Dell’Oro Group showing ” HP and Aruba had ~5% and ~13% revenue share, respectively, in Worldwide Enterprise WLAN in 3Q14, with Cisco leading the market at ~52%.”

Adds Passi, “Given Cisco’s dominance and the lack of a formidable market-share holder outside of it, we believe an HP-Aruba pairing could make sense for the industry overall.”

Moreover, the wireless LAN market is a healthy one, with another big driver of gear sales coming: “802.11ac being a multi-year product upgrade cycle. In our opinion, the 11ac cycle is still in its early stages.”

Both Richard Kugele of Needham & Co., who follows HP and rates its shares a Hold, and his colleague Rich Valera, who rates Aruba a Buy with a $25 price target, wrote in about the merits of a deal this afternoon.

Velera writes that buying Aruba for a number two position makes sense:

HPQ already has a Wi-Fi business – but it’s small (about 1/4th the size of ARUN) and losing share. Buying ARUN would make them a solid number 2 in the Wi-Fi market to Cisco with about 20% share, but would also require some meaningful rationalization of their own Wi-Fi products. Otherwise, the deal could make sense for HP.

Kugele writes that the price is rather large given HP CEO Meg Whitman‘s stated intention not to do big deals:

We believe this would be a large price tag for a company that has said it would not be making big deals, especially before splitting such a massive company in two. While there could be some level of strategic logic, we believe undertaking a large price tag acquisition at this stage (by a management team with a less than stellar acquisition history) could prove disruptive. We would be incrementally more cautious on the name should this deal proceed.

As far as tomorrow’s Aruba earnings report, Bernstein Research‘s Pierre Ferragu, who has an Underweight rating on the stock, this morning weighed in with his thoughts on what to expect from the quarter:

This quarter we expect the company to report about in line with consensus and at the high end of guidance. Management guidance for this quarter points to revenue growth 6pts below normal seasonality and marks, in our view, the beginning of a slowdown as 11ac reaches 40-50% market revenue penetration. On a 12-month horizon, we maintain a negative perspective on the name and are 10% below consensus on FY2015 EPS. With the recent pullback, current valuation makes a short position less attractive into numbers.

Fiber optics networking equipment maker Ciena (CIEN) will report fiscal Q1 results a week from Thursday, March 5th, and analysts are tuning up their models for the company.

The Street is, on average, modeling $558 million in revenue and 2 cents profit.

MKM Partners‘s Michael Genovese today reiterated a Buy rating on the shares, and a $25 price target, writing that “investors should react positively to the report, we think, on a strong sequential sales outlook for the April quarter and GMs trajectory that likely confirms the AT&T (T) pricing concessions improved meaningfully starting January 2015.”

Genovese is modeling a slight beat, perhaps $560 million in revenue and 6 cents in EPS. He actually lowered his EPS estimate from a prior 9 cents to account for “Brazilian currency hedging.”

For the current quarter, he thinks “Management is likely to sound upbeat for several reasons including solid U.S. Tier 1 incumbency, strong demand growth from Web 2.0 and Cable customers and improving international sales prospects.” Genovese models the company forecasting $597 million in revenue and perhaps 22 cents per share in net income. That is also slightly above consensus for $596 million and 20 cents per share.

Shares of networking chip maker EZchip Semiconductor (EZCH) today fell 19 cents, or 0.9%, to close at $21.56, after the company announced a new part, the “Tile-Mx100 multi-core processor,” the fruits of an acquisition last November of chip designers Tilera.

The Benchmark Company’s Gary Mobley, who has a Buy rating on EZchip shares, and a $29 price target, writes that the part is “transformational for EZchip for a two primary reasons,” including its use of the ARM Holdings (ARMH) instruction set architecture:

First, the Mx100 processor represents a combined product roadmap following EZchip’s November 2014 acquisition of Tilera. Second, the Mx100 represents EZchip’s transition into the ARM processor core ecosystem, an ecosystem more programmer-friendly and mainstream when compared to Tilera’s custom 64-bit cores used in Tile-Gx multicore processors. It is also worth noting that the Tile-Mx100, if successful, adds an additional layer of end market and customer diversity for EZchip (vs. the company’s current heavy customer concentration with Cisco and end market concentration to edge routing). Management previewed the Mx100 on the company’s recent 4Q14 EPS call, and FY15 op ex guidance of ~$55.0 million already includes the cost of developing the Mx100 (along with NPS development, etc.).

EZchip said the first samples will go to customers in the second half of next year.

Update: Another fellow weighing in today was Sanjay Chaurasia with Nomura Securities, who doesn’t formally cover EZchip but does cover competitor Cavium (CAVM), which makes a comparable chip called the ”ThunderX.” With the Mx100, writes Chaurasia, EZchip has made an interesting decision not to chase Intel‘s (INTC) performance lead in server chips:

One interesting aspect of this chip is the choice of A53 cores vs. custom cores by Cavium in its ThunderX chips (similar to A57, we believe). We note that A53 provides roughly half the performance of an A57-core. Therefore, although the total computing horsepower of this chip is likely similar to the 48-core ThunderX chip, power consumption of this chip is only 70W vs roughly 150W (Nomura est) for Cavium’s ThunderX chips. We think a likely reason for this architectural choice is that ARM cores are unlikely to catch up to the higher single-threaded or per core performance of x86 processors. Based on published benchmarks, we estimate that 22nm Haswel Xeon cores today are 5-6x higher in per core performance than the available 28nm ARM 64-bit cores. As such, we think that EZChip is instead trying to support more threads (100 in total) in its Mx100 chip and trying to optimize power consumption rather than push the per-socket or per-core performance. Cavium’s ThunderX chip will support roughly half the threads (48) of Mx100 (100 threads). One significant implication of this architectural choice from EZchip is that ARM servers will likely find more success by packing in more cores per chip and optimizing on power consumption rather than focusing on more performance (per core).

He concludes that EZchip and other challengers to Intel in server chips will have to pick off “the low-hanging fruit”:

We expect Broadcom (BRCM) (covered by Romit Shah) to enter the ARM server space in 2016 with its Vulcan chip, which, interestingly, we believe is focused on improving per-core performance. Broadcom’s Vulcan is based on 16nm FinFET; it is expected to support 4 threads per core (vs. 2 in x86 cores) and achieve roughly 90% of the performance of the Haswell-based x86 core. Although we think it is too early to predict which architectural approach will create more value, we think packing more cores and optimizing power consumption in an ARM server chip is lower hanging fruit.

Sometime in the coming weeks, fiber optics giant JDS-Uniphase (JDSU) is likely to file paperwork for its announced split into two publicly traded companies, according to my sources.

I spoke yesterday by phone with JDS‘s CEO Tom Waechter, and Alan Lowe, who runs the optical components business; the two gentlemen will become the CEOs of the two companies when the split happens, sometime later this year.

JDSU’s head of its optical components business, Alan Lowe.

As explained in the original announcement back in September, one of the two companies will house JDS’s optical components, such as “multiplexers,” amplifiers, and lasers, and that company is being referred to as “SpinCo” until a formal name is disclosed. Lowe will run SpinCo.

The other one will consist of the company’s test and measurement products, and its products for enabling security. It is being called “NewCo.” and will be run by Waechter.

Waechter and Lowe were not at liberty to discuss the terms of the split, such as how stock will be distributed to investors: that has to wait for the filing.

Waechter did offer that “What we’ve consistently said is SpinCo. will be debt-free and adequately capitalized; we have a strong balance sheet today, and SpinCo. will go out clean; it’s not like a lot of these companies that layer a lot of debt on a SpinCo.”

In the absence of financial details, both spoke in broad strokes about the opportunities available to each business.

My first question was, Why Now?

Waechter made clear there are both advantages to the running of the different product lines but also an appetite from investors for an investment that’s simpler to understand compared to the mix of products inside JDS now.

“We feel that we are really going to be able to increase our agility with this move,” said Waechter.

The markets are moving quickly that we play in, and we can focus better on those markets by operating these businesses separately. With three business units inside JDSU, it gets a bit complex. And then, we can use this as a catalyst to reduce operating costs. We’re looking at $50M of net reductions on an annual basis.

Added Waechter, “This will provide more distinct and clear investment opportunities in these two growth companies.”

There’s also the prospect that once broken up, the two units can pursue more M&A than in past.

Lowe admitted as much with respect to SpinCo.:

We weren’t able to do a lot of acquisitions with CCOP [the components business]. We did buy a commercial laser business last year, but now it will be easier for both sides to look at further opportunities. There will be more consolidation in this industry, that will happen. As a standalone business, SpinCo. will be able to look at the landscape around us of inorganic and organic investments. And with inorganic, where we haven’t done much, that’s an area of focus for us; we bought Time Bandwidth Products in Switzerland a year ago to get ultra-fast lasers, and with our go-to-market sales force, we have made that a fantastic combination.

Expanding upon the idea, Waechter observed,

Both areas [SpinCo.'s and NewCo.'s respective markets] could see further consolidation. NewCo.’s market has been a pretty fragmented market, with niche players serving certain areas. Customers are looking to reduce the number of suppliers, and that’s what we’ve been driving for a number of years now. There’s a number of competitors to NewCo. out there in that space that you could benchmark against. In the traditional part of the business we always looked at EXFO (EXFO) and Tektronix [a unit of Danaher (DHR)]as competitors. As we move more into software, like video monitoring, you’ve got a company like Gigamon (GIMO).

Waechter said that the plan has been in the works for three years, and the company has been preparing the respective teams internally, so that JDS can “still be JDSU but really get a running start with the split, continuing to support customers on a day to day basis.”

Adds Lowe,

We made a lot of changes in various parts of the business to prepare for that –things such as getting to a variable cost model, expanding our customer base. We kept those quite separate except for a shared services layer. I think this is really the time to do the separation, and the portfolios have been updated to prepare for what’s happening.

“All the milestones are in place,” for a filing, said Waechter. “We’re on, or ahead of schedule.”

I asked about the response so far from investors.

Lowe remarked that “from an employee standpoint, and a customer standpoint, there’s excitement, and there has been an overwhelmingly favorable bias from investors.”

Added Waechter, “We meet with investors regularly, especially after the earnings reports, and there’s a lot of support. They get the benefits of this split, the agility and the focus, and they like how it will simplify the investment strategy.”

NewCo is not just a test company: Waechter envisions it as a cloud computing outfit, in that it is helping operators with the new way that they are building their networks, including software-defined networking, or SDN. With SDN, more and more code is used to abstract away the details of the underlying communications equipment:

For network enablement, and service enablement, we have a real history with service providers of helping them deal with changes in their networks, especially in software-defined networks. They are looking for someone to provide an end-to-end solution, from the actual testing of those networks to data collection and analysis [...] NewCo. includes test and instrumentation, but we are also starting to evolve those products to more virtualization environments such as putting the instrumentation in the cloud, and then a tech can use a smartphone when they’re out in the field to tie back to the cloud. It has more software content, it will help the operators be more proactive, to really help them analyze that data, monetize that data. We’re now also moving more into the enterprise market. We bought Network Instruments [in January of last year] to help us move into enterprise, and then we’re also working with cloud providers, which Alan’s doing too. One thing that’s encouraging to us is that growth rates can be higher in that part of the business. The software part is new to everyone. That’s been part of the lumpiness in spending by service providers. They have needed to understand what’s the best return on their investment. Service providers are seeing more competition from some of the Web 2.0 guys. There’s been somewhat of a pullback on investment by operators, and that looks to us like pent-up demand.

Another part of NewCo. are the security products, the so-called OSP business, which Waechter says is a “very high-margin business, and very important to us.”

About half the business consists of special pigments the company makes that go into ink for bank notes. Another area is “micro mirrors” that help detect various types of materials.

The OSP business is $200 million annually, and typically has gross margin of around 50% to 52%, says Waechter, and a 36% to 38% operating margin.

Lowe, reviewing SpinCo, noted that it plays in three markets: telecom and commercial optical products, such as muxes and modems and amps; “datacom,” especially the building out of new data centers; and a commercial lasers business “that has been growing rapidly,” he says, including components that go into mobile applications, a fast-growing business, and into machining of parts, including large, multi-kilowatt fiber lasers for metal cutting.

SpinCo. will have an increasing number of Web 2.0 customers, just like NewCo., as the Web giants seek out their own supply of fiber optic components to build networks and data centers – think of Google (GOOGL) with its “Google Fiber” broadband initiative.

“The Webscale clients, as they build out the infrastructure of cloud, have been a more significant part of SpinCo.,” said Lowe.

“And we expect they will continue to outpace our overall growth, both directly, as they build their data centers, and indirectly, as they put more requirements on service providers to carry their data.”

He continued, “Moving to the cloud is a very, very good thing for SpinCo., and as the build-out continues, bandwidth under the ocean for our sub-sea products will grow. It all really drives terrestrial as well as sub-sea optical components.”

The mobile part of things includes “3-D sensing” components, and Lowe said “we’ve done a lot of work in this the last four to five years, primarily in the gaming market, and what’s really exciting is the move outside of gaming to personal computers, where you can control things with hand gestures, for example.”

“And then down the road, 3-D sensing will show up in mobile phones and tablets.”

“That’s where the units get very, very large,” observes Lowe. “As miniaturization gets more important. Our investment puts us at the forefront of all that.”

3-D sensing makes use of lasers that JDS makes, but also the OSP filters that NewCo. makes.

Those filters screen out ambient light so a sensor sees “only the wavelength you want,” explains Lowe. The two new companies will “probably have some kind of a marketing agreement to tie us together because there is some synergy there,” says Lowe. “Customers like to see we are aligned to meet their specific needs.”

JDS Uniphase shares on Friday rose 25 cents, or 1.9%, to close at $13.53. The stock is up 12% since the announcement, outpacing the 5.7% return of the S&P 500.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.